Studying and Teaching the Art and Science of Launching and Scaling Sustainable Enterprises

Global Entrepreneurship Monitor

The Global Entrepreneurship Monitor (“GEM”) is a partnership between the London Business School and Babson College that administers a comprehensive research program to produce annual assessments of national levels of entrepreneurial activity. The project was first launched in 1999, when it covered just ten countries, and has since grown to cover as many as 85 countries in subsequent years and is recognized as the largest ongoing study of entrepreneurial dynamics in the world. The main objectives of the GEM program are measurement of differences in the level of entrepreneurial activity between countries, uncovering the factors that lead to appropriate levels of entrepreneurship and making suggestions for policies that may lead to enhancement of national levels of entrepreneurial activity. The GEM, like other models, has always been focused on exploration of the link between entrepreneurship and economic development and its original model attempted to integrate several variables thought necessary to enable business activity including entrepreneurial capacity, entrepreneurial opportunities and certain “entrepreneurial framework conditions” discussed in more detail below. Recently, the GEM model was revised to take into account that the contribution of entrepreneurs to an economy varies according to its phase of economic development, with those phases being defined in the manner suggested by Porter et al. and described elsewhere in this chapter, namely “factor-driven economies”, “efficiency-driven economies” and “innovation-driven economies”. A large amount of information regarding the work of the GEM researchers is available at its website and in addition to the annual global reports, such as the one for 2011 referred to herein, there are a number of country-specific “national reports” that provide international benchmarking, local context and recommendations for national entrepreneurship policies.

The GEM is based on a conceptual model of the institutional environment and its effect on entrepreneurship. The model recognizes the importance of the social, cultural and political context in which entrepreneurial activities occur and assumes that these contextual factors influence three sets of conditions: basic requirements, which include institutions, infrastructure, macroeconomic stability, health and primary education; “efficiency enhancers”, which include higher education, goods and labor market efficiency, financial market sophistication, technological readiness and market size; and the “entrepreneurial framework conditions” discussed below. Entrepreneurship itself is measured by looking at the entrepreneurship profile of prospective and actual entrepreneurs, including their attitudes, activities and aspirations; and at the entrepreneurship process itself. The GEM researchers acknowledge that entrepreneurship is a process that extends over multiple phases, thus allowing opportunities for assessing the state of entrepreneurship in a particular society at different phases. These entrepreneurship phases can be briefly summarized as follows[1]:

Potential entrepreneurs: These are persons who see opportunities in their areas, believe they have the abilities and resources to start businesses to pursue those opportunities and who are not deterred by fear of failure in pursuing those opportunities. The level of broader societal support for entrepreneurship is also important at this phase. The GEM survey uses a variety of measures of entrepreneurial perceptions, intentions and societal attitudes including perceived opportunities, perceived capabilities, fear of failure, entrepreneurial intentions, entrepreneurship as a “good career choice” high status to successful entrepreneurs and media attention for entrepreneurship.

Expected entrepreneurs: Expected entrepreneurs are those persons who have not yet started a business but who have expressed an expectation that they would start a business within the next three years.

Nascent activity: This phase covers the first three months after the entrepreneur establishes a new business to pursue the identified opportunities.

New business owners: These are persons who have successfully emerged from the nascent phase and have been in business more than three months but less than three and one-half years.

Established businesses: These are businesses that have been operating for more than three and one-half years, thus moving beyond “new business owner” status.

Discontinued businesses: Discontinued businesses, regardless of how long they were operating, are factored into the analysis because they are a source of experienced entrepreneurs who may start new businesses and/or use their expertise and experience to support other entrepreneurs (e.g., by providing financing and/or business advice).

Data collection for the GEM project includes a minimum of 2,000 adult (i.e., 18-64 years of age) population surveys in each GEM country to track the entrepreneurial attitudes, activity and aspirations of individuals; and input and assessment from a minimum of 36 experts in each GEM country on “entrepreneurial framework conditions”, or “EFCs”, that are thought to reflect major features of a country’s socio-economic milieu that are expected to have a significant impact on the entrepreneurial sector. The adult population surveys provide a means for measuring individual involvement in venture creation, identifying the motives of entrepreneurs, measuring the aspirations of entrepreneurs with respect to pursuing high growth and/or activities in foreign markets and understanding the societal climate for entrepreneurship. The “climate for entrepreneurship” includes not only the perceptions of prospective entrepreneurs regarding the availability of opportunities around them, their ability to start businesses and the value of doing so but also the availability of positive support from others regarding entrepreneurship as measured by “societal perceptions” of entrepreneurship and the willingness of vendors and investors to supply tangible and financial resources. The national expert surveys measure the following nine EFCs:

Finance: The availability of financial resources—equity and debt—for small and medium enterprises (“SMEs”) (including grants and subsidies);

Government policies:The extent to which taxes or regulations are either size-neutral or encourage SMEs;

Government programs: The presence and quality of direct programs to assist new and growing firms at all levels of government (national, regional, municipal);

Entrepreneurial education and training: The extent to which training in creating or managing SMEs is incorporated within the education and training system at all levels (primary, secondary and post-school);

R&D transfer: The extent to which national research and development will lead to new commercial opportunities and is available to SMEs;

Commercial and professional infrastructure: The presence of property rights and commercial, accounting, and other legal services and institutions that support or promote SMEs;

Entry regulation: Contains two components including “Market Dynamics”, which is the level of change in markets from year to year, and “Market Openness”, which is the extent to which new firms are free to enter existing markets;

Physical infrastructure and services: Ease of access to physical resources—communication, utilities, transportation, land or space—at a price that does not discriminate against SMEs; and

Cultural and social norms: The extent to which social and cultural norms encourage or allow actions leading to new business methods or activities that can potentially increase personal wealth and income.

The GEM researchers measure “total early-stage entrepreneurial activity”, or “TEA”, for each country by identifying and combining entrepreneurs who are either engaged in nascent activities or acting as new business owners. In addition to a TEA rate for each country, the GEM researchers also score and rank countries with respect to established business ownership rate, discontinuation of businesses, necessity-driven entrepreneurship as a percentage of TEA and improvement-driven opportunity entrepreneurship as a percentage of TEA. Countries are grouped by their phase of economic development so that comparisons can be made among comparable countries and researchers can also track how entrepreneurial activities change as countries develop economically and socially. As noted above, the GEM researchers borrowed from Porter by suggesting that countries go through three stages of economic development: a factor-driven stage; an efficiency-driven stage; and, finally, an innovation-driven stage.[2] Acs and Szerb have provided the following brief descriptions of each of these stages:[3]

The factor-driven stage is marked by high rates of agricultural self-employment and countries in this stage generally compete based on low-cost efficiencies in the production of commodities or low value-added products. Countries in this stage do not create knowledge that can be used for innovation nor do they use knowledge to engage in exporting activities. In the 2011 GEM survey, for example, seven of the 54 countries fell into the factor-driven stage including Guatemala (with the highest TEA among the group) and Pakistan (with the lowest TEA among the group).[4]

The efficiency-driven stage requires that countries engage in efficient productive practices in large markets so that firms are achieve and exploit economies of scale. Industries in this stage are generally manufacturing-based and focused on the production and distribution of basic goods and services. Self-employment tends to decline during this stage and capital, labor and technology begin to emerge as the key drivers of productivity. In the 2011 GEM survey, for example, 24 of the 54 countries fell into the efficiency-driven stage including China, Chile and Peru with the highest TEA rates among the group and Hungary, Malaysia and Russia with the lowest TEA rates among the group.[5]

In the innovation-driven stage, the key input is “knowledge” and decisions about embarking on new projects are based on primarily on expected net returns and the likelihood that economic activities can generate high value added products and services. In the 2011 GEM survey, for example, 23 of the 54 countries fell into the efficiency-driven stage including Australia and the US with the highest TEA rates among the group and Denmark, Japan and Slovenia with the lowest TEA rates among the group.[6]

As discussed below, as countries transition between stages of development there will be changes in their entrepreneurship profile. Even among comparable countries, countries at the same stage of economic development, the rate and profile of entrepreneurship may vary significantly due to environmental constraints that are specific to a given country. For example, a country may have a high rate of start-up activity but fail to maintain that rate at the established business phase due to societal factors that make it difficult for nascent entrepreneurs to maintain their momentum and get their businesses to the point where they are sustainable. In addition, the GEM researchers have often cautioned that higher TEAs do not necessarily imply better economic conditions. For example, certain nations with higher levels of TEA, such as the United Arab Emirates, Iceland and Greece, experienced severe economic distress in the early 2010s and some innovation-driven economies, such as Japan, have historically had low levels of TEA.

For 2011 survey results obtained from interviewing over 140,000 adults in 54 countries led the GEM researchers to make the following estimates[7]:

388 million entrepreneurs were actively engaged in starting and running new businesses;

There were 163 million women early-stage entrepreneurs; however, in most of the surveyed countries the entrepreneurship rates for women were significantly lower than for men;

There were 165 million young early-stage entrepreneurs (i.e., between the ages of 18 and 35) and, in general, early-stage entrepreneurs tended to be young to mid-career (i.e., from ages 25 to 44) and entrepreneurs tended to be younger in the efficiency-driven economies;

141 million of the early-stage entrepreneurs expected to create at least five new jobs in the next five years;

65 million of the early-stage entrepreneurs expected to create 20 or more new jobs in the next five years;

69 million of the early-stage entrepreneurs offered innovative products and services that are new to customers and have few other competitors; and

18 million of the early-stage entrepreneurs sell at least 25% of their products and services internationally.

The results reported by the GEM researchers reflect some of the nuances in their assessment of entrepreneurial activity. In particular, the researchers who prepared the results of the 2011 GEM survey noted the interest in identifying the “profile of entrepreneurs”, rather than just the number of entrepreneurs, and that the report focused on three profile factors: inclusiveness, including the availability of entrepreneurial activities to women and people of various ages; industry, realizing that the skills and other attributes of entrepreneurs will differ from industry-to-industry; and, finally, impact, which looks at the role of innovation in an entrepreneurial endeavor and the aspirations of the entrepreneur with respect to internationalization and growth.[8]

The 2011 GEM survey also generated data that allowed the researchers to reach various conclusions regarding entrepreneurial activities in the 54 countries that were part of the survey. Highlights included the following[9]:

With regard to potential entrepreneurship, countries included among the factor-driven economies displayed higher average perceptions about entrepreneurial activities in their area than countries falling into the other two development levels and also displayed higher perceived capabilities to start a business than countries classified as efficiency- or innovation-driven economies. The researchers explained that these differences could be attributed to individuals having different ideas about what kind of businesses to establish based on their level of development and noted that consumer-oriented businesses were the most popular in factor-driven economies while innovation-driven economies had a higher proportion of business services enterprises than countries in the other two development levels.

Potential entrepreneurship varied significantly among countries in the same level of economic development. For example, the researchers pointed out that while Bangladesh, a factor-driven economy, scored highly on perceived opportunities the pool of entrepreneurs in that country was reduced by a high lack of confidence in ability to start a business and a high fear of failure. On the other hand, another factor-driven economy, Venezuela, displayed only an average level of perceived opportunities but had strong positive opinions regarding ability to start a business and a low fear of failure.

A number of European countries who had been pummeled by adverse economic conditions at the time of the survey had relatively low perceptions of opportunities and low rates of opportunities and capabilities were also found in some of the innovation-driven Asian economies such as Japan, Korea and Singapore. The score from the respondents from the US with respect to perceived opportunities fell near the average of the innovation-driven economies; however, they were generally quite confident of their abilities to start a new business and had a relatively low fear of failure.

The researchers asked respondents whether they felt that entrepreneurship was a “good career choice” and found that the percentage of respondents answering affirmatively declined as economic development improved. This finding was supported by the fact that perceptions about the status of entrepreneurs were higher in the factor-driven economies than in the other two development levels.

Entrepreneurial intentions, as measured by the percentages of individuals who had not yet started a business but had expressed an intention to start a business within the next three years, were highest in factor-driven economies. Entrepreneurial intentions declined as the level of development increased. There was evidence that entrepreneurial intentions were influenced by the types of economic activities typically carried out in a country with countries that placed a high emphasis on extractive resources (i.e., Russia and the United Arab Emirates) having relatively low entrepreneurial intention rates.

From 2010 to 2011 there was a significant increase in TEA rates in many economies across all development levels, an interesting trend given the turbulent economic conditions that countries all over the world were experiencing during that time.

Consumer-oriented business (e.g., retail enterprises) tended to dominate entrepreneurial activities at the factor-driven and efficiency-driven stages; however, business services, which rely and compete on knowledge and technology, were the most prominent among entrepreneurs in the innovation-driven economies.[10]

Among factor-driven economies necessity- and improvement-driven opportunism as a percentage of total TEA is roughly the same; however, as the level of development increased the necessity-driven opportunism became less important as a motivator to start a new business and improvement-driven opportunism became more important as a motivator.[11]

Comparing TEA rates to the rate of established business ownership, the GEM researchers found that TEA rates were highest in the factor-driven economies and decreased as the level of development increased and necessity-driven entrepreneurship declined. There were significantly more early-stage entrepreneurs than established business owners in the factor-driven economies; however, on average, by the time a country reached the innovation-driven stage it could be expected that the TEA rate would drop slightly become the level of established business ownership.

Business discontinuance declined as the level of economic development increased, a finding attributed, at least in part, to the higher proportion of entrepreneurs at the earlier development phases and the higher levels of risk that those entrepreneurs must overcome. Business closings among factor- and efficiency-driven economies were often blamed on a lack of profitability and sources of financing while business discontinuances in the innovation-driven economies were more likely due to retirement, sale or the desire to pursue another opportunity.

The GEM researchers also focused on three other important measures of entrepreneurship: entrepreneurs’ expectations regarding growth in terms of number of persons that will be employed in five years, the degree of “innovation” involved in the entrepreneur’s product or service and “internationalization” (i.e., the extent to which entrepreneurs sell to customers in foreign countries).[12] Innovation was measured by looking at the extent to which an entrepreneur’s product or service was new to some or all customers of the entrepreneur and whether there were few or no other businesses offering the same product or service. Measured in this way innovation is context-dependent and determined by the entrepreneur’s main customer market. Accordingly a product or service offered for the first time in one country would be deemed innovative with respect to that country even if the product or service is commonly sold by number of competitors in other countries. Internationalization was measured by looking at what percentage of the entrepreneurs in a given country had at least 25% of their customers in foreign countries.

The survey results included growth expectations for the 54 countries at three levels: 0-4 employees in five years (low growth expectations), 5-19 employees in five years (medium growth expectations) and 20 or more employees in five years (high growth expectations). While factor-driven economies had more entrepreneurs, most of them were in the low growth category. On the other hand, innovation-drive economies had a lower percentage of entrepreneurs but those entrepreneurs were much more likely to have high growth expectations. As for innovativeness, it is not surprising that the researchers found that it increased along with the level of economic development. Finally, internationalization, like innovation, was lowest in the factor-driven economies but rose as economic development improved. Internationalization appeared to be influenced by factors other than just economic development such as the size of the population and land mass in the “home country” and the size and diversity of the local market.

The GEM researchers suggest that the nature of entrepreneurship and its contribution to the national economy changes as economies development and development should be accompanied by changes in emphasis of governmental policies. For example, since economic development in factor-driven economies is largely driven by the “basic requirements” in the GEM conceptual model of the relationship between the institutional context and entrepreneurship, emphasis during that phase should be placed on development of institutions, infrastructure, macroeconomic stability and health and primary education. Once an economy transitions into the efficiency-driven phase, government policies should be focused “efficiency enhancers” including the proper (i.e., “efficient”) functioning of goods and labor markets, development of higher education systems, enhancement of technological readiness and increasing the scope and sophistication of financial markets. While these initiatives may not have an immediate direct impact on entrepreneurship they will provide the foundation for attracting and enabling higher levels of entrepreneurship in the future. Finally, economies in, or about to enter, the innovation-driven phase requires governmental attention to each of the various EFCs mentioned above in order to create jobs and spur technical innovation.

This post is part of the Sustainable Entrepreneurship Project’s extensive materials on Entrepreneurship.

[3] Z. Acs and L. Szerb, “The Global Entrepreneurship and Development Index (GEDI)” (Paper presented at Summer Conference 2010 on “Opening Up Innovation: Strategy, Organization and Technology”, Imperial College London Business School, June 2010).

[10] Id. at 18. In addition to consumer-oriented businesses and business services, the GEM survey also tracked extractive and transforming activities.

[11] The GEM defined “necessity-driven” entrepreneurs as those persons who start new businesses because they have no other work options and need a source of income while improvement-driven entrepreneurs are defined as those persons interested in pursuing an opportunity and who do so in order to improve their incomes and/or independence in their work. Id. at 13. For further discussion of necessity-driven entrepreneurship and other methods for classifying “types of entrepreneurship”, see “Definitions and Types of Entrepreneurship” in “Entrepreneurship: A Library of Resources for Sustainable Entrepreneurs” prepared and distributed by the Sustainable Entrepreneurship Project (www.seproject.org).